Auction-Rate Danger Flagged in '05

Accounting firms raised questions about auction-rate securities' resemblance to cash almost three years before the market failed and before authorities cracked down on Wall Street's biggest firms for allegedly overstating the safety of the investments to investors.

In settlements with state authorities and the Securities and Exchange Commission last week, Citigroup(C Quote) and UBS(UBS Quote) agreed to buy back more than $26 billion in auction-rate securities and pay a cumulative $250 million in fines for allegedly marketing the investments to investors as an alternative to cash.

Regulators might have saved themselves the trouble years before the credit crisis set in, had they paid heed to accounting firm PricewaterhouseCoopers. In May 2005, the firm issued an opinion on auction-rate securities, arguing that the instruments should not be considered a cashlike product. ...